Banks see sharp fall in PE ratios

With share prices of commercial banks witnessing correction in the last fiscal year, their price to earning ratio (PE ratio) came down sharply at the end of fiscal year 2010-11.

PE ratio is calculated by dividing share price by per share earning.

According to unaudited fourth quarter reports of commercial banks, their PE ratios, one of the major investment indicators of the stock market, came down sharply over the last year along with the freefall in the stock market.

A majority of the 17 banks that published financial results of the last fiscal year saw their PE ratio standing between 10 and 20. This is a sharp fall compared to the previous year when the ratio was above 20. Last year, Machhapuchhre Bank’s PE ratio was as high as 56.90 followed by Global Bank with 52.48. Now, Global’s ratio has come down to 13.85.

Last year saw a sharp correction in bank’s PE ratios, which is evident with the fact that banks like Standard Chartered witnessed a sharp decline in their PE ratios. The Standard Chartered’s ratio came down to 25.92 from 42.23. Other banks witnessing PE ratio above 20 are DCBL Bank and Citizens Bank International.

Stock analysts say an average PE ratio of 15 is justifiable for commercial banks. “PE ratios of well-priced stock stand between 10 and 17, whereas if it goes lower than 10, the stock is said to be less-priced,” said analyst Rabindra Bhattarai.

Currently, Nepal Investment Bank, Agriculture Development Bank, Nepal Bangladesh Bank and Lumbini Bank have PE ratios less than 10. Bhattarai said for companies having higher growth prospects, the PE ratio can go as high as 25 and still such stock is not considered speculative.

NIC Bank CEO Sashin Joshi expressed a similar view. “The reasonable PE ratio of commercial banks should be between 15 and 20,” he said. However, the investors do not consider PE ratio while making investment decision. “Other factors such as corporate governance, strategy and management of a company are also taken into account before buying stock,” said Joshi.

Despite the higher PE ratio, according to Bhattarai, investors are interested in investing in SCB’s stock due to its goodwill and strong corporate governance.

Joshi predicted further adjustment in PE ratio of some banks.